TABB Forum: For the past few years, coverage of Mexico in the U.S. media has largely been dominated by stories of violence stemming from the country’s drug cartels. Lately though, the media have increasingly been turning their attention to the story of Mexico’s booming economy, and new president Enrique Peña Nieto’s bold moves to radically reshape it. This robust growth in Mexico looks set to continue for some time, which has led the Financial Times to label Mexico as the “Aztec Tiger.”1

MexDer, the nation’s only futures exchange, has been taking steps to ensure that it grows apace with the nation’s economy by making substantial upgrades to its matching engine, while continuing to make it easier for foreign investors to access the market. As a result of these changes, as of yesterday, April 14, north-to-south routing to MexDer via CME Group’s Globex® platform is available on Trading Technologies. You can read the details in the news release that we published today and on TradingTechnology website.

The Aztec Tiger

A perfect storm of positive influences is coming together to make Mexico one of the world’s emerging economic powerhouses. Mexico has a young and growing population, low levels of government debt and low inflation. The country is developing into a leading exporter due in part to widespread implementation of new manufacturing processes, but also due to the fact that Mexico has free trade pacts with 44 countries—more than any other nation on earth.These forces have combined to make Mexico’s economy one of the few bright spots in a global economy still working off the hangover resulting from the credit bubble. Mexico’s economy grew at around four percent in 2012, quadruple the growth rate of Latin America’s largest economy, Brazil.2 The Mexican peso hit a 19-month high against the U.S. dollar in March, and has outpaced 16 other major world currencies over the last month.3

With its growth track record and favorable conditions for growth to continue, a Nomura Equity Research report in July 2012 predicted that Mexico would overtake Brazil to become the largest Latin American economy within the next decade.4 In addition, Standard & Poor’s and Fitch have indicated that in the near future, they are likely to upgrade Mexico’s debt, which is already investment grade.5

A Pact for Mexico, An Open Door for Growth

Much of the optimism for Mexico’s future can be traced back to its new president, Enrique Peña Nieto. He hails from the Institutional Revolutionary Party (PRI), which ruled Mexico uninterrupted for 71 years and was identified with corruption and inefficient bureaucracy. That being said, President Nieto is quickly making himself known as a risk taker, willing to take on fights in which none of his predecessors seemed willing to engage.

Within two days of his swearing-in last December, Nieto’s PRI signed a “Pact for Mexico”6 with the opposition National Action Party (PAN). This pact outlines 95 proposals to modernize and liberalize Mexico’s economy. Nieto began by taking on the richest man in the world, Carlos Slim, by announcing plans to foster competition in the telecommunication and television industries, which are currently dominated by monopolies. Later this year, Nieto is expected to propose his most significant change, opening up Mexico’s energy market and allowing the state-run oil concern Pemex to work with the world’s largest oil companies. It’s expected that these reforms, once enacted, will increase Mexico’s GDP growth from four percent to six percent a year.7

Making MoNeT

In parallel, MexDer and the Mexican government have done quite a bit to attract foreign investors, and to make it easy for them to access the market. Perhaps one of the most significant changes has been the development of the MoNeT matching engine, which went live on Bolsa Mexicana de Valores (BMV), the equities segment, last fall.

The MoNeT matching engine was designed to attract high-frequency traders, mainly from the U.S. and Europe. It boasts internal latencies of 90 microseconds, which is faster than the 110 microseconds of NASDAQ or 125 microseconds at the London Stock Exchange.8 BMV volumes have increased 30 percent to 40 percent since the launch of the new matching engine.9For international traders and investors, accessing MexDer is straightforward. The north-to-south routing available via CME Globex allows any TT customer with an existing CME infrastructure to route orders to MexDer’s matching engine. MexDer is also accessible now in TT’s MultiBroker environment, which is currently available in beta. Additional information regarding how CME users can access MexDer is posted on the CME website.There are a number of other reasons why doing business in Mexico is easier than most other Latin American countries. Unlike Brazil, there is no withholding tax of any kind on foreign investment. The Mexican peso is a freely traded and easily convertible currency, and MexDer’s clearing house, Asigna, accepts U.S. dollar-denominated collateral.

La Oportunidad Está En Todas Partes

Owing to the fact that the U.S. does $1.5 billion per day in trade with Mexico,10 the Mexican markets are, predictably, highly correlated with America’s. North-to-south customers trading MexDer via Globex have access to a number of financial futures that allow for arbitrage opportunities against their American counterparts.

MexDer lists the IPC index of the BMV, which in general tracks closely to the S&P 500. The full Mexican yield curve is available on MexDer, from one-month bills to 30-year bonds, and it converges with the U.S. yield curve. Finally, MexDer lists a Mexican peso/U.S. dollar FX future, one of the 20 biggest FX futures contracts in the world by volume, which sets up arbitrage opportunities with the CME’s equally liquid peso/U.S. dollar future. In a recent MarketsWiki interview, MexDer CEO Jorge Alegria indicated that going forward, the exchange would likely look to list commodity futures linked to similar contracts listed on CME Group.

BMV IPC vs. S&P 500
Chart obtained from Yahoo! Finance

The ascent of the Aztec Tiger is no sure thing. There is always the danger of President Nieto’s PRI party losing its appetite for reform and returning to its old ways. There’s the chance that the hiccups in the U.S. economic recovery may impact Mexico, given that 30 percent of the Mexican economy is tied to U.S. exports. There may even be signs that Mexico’s economy is stalling already, which led the central bank to reduce interest rates for the first time since March 2009. Either way, TT users now have the ability to participate in one of today’s most interesting markets.

In the last 12 months dramatic changes have occurred at Mexico’s stock exchange and among its brokerage clients. Cross border partnerships, technology upgrades, new FIX infrastructure and business friendly regulatory changes have opened the Mexican market to high frequency trading (HFT).

While US regulators can be seen to scold HFT firms, the Mexican market has opened its arms. The Mexican Exchange (BMV) and its brokerage firms have upgraded their infrastructure and sought business opportunities north of the border. Earlier this year after the CME Group and the BMV signed their partnership, high frequency traders on the CME Globex trading system began to route orders to the Mexican Derivatives Exchange or MexDer. Today 90 percent of average daily volume on the MexDer comes from high frequency traders north of the border.

Mexico’s brokerage firms have completed significant infrastructure upgrades. Last spring only a few brokers in Mexico could handle a highfrequency hedge fund client and many Mexican brokers could process no more than one connection to the Bolsa Mexicana de Valores (BMV) at a time. The landscape has changed quickly and improvements in broker and exchange systems have ushered in a new capacity for speed in the transmission and execution of orders in Mexico.

Over the summer a major milestone occurred for the industry. Working with the BMV, Mexico’s brokers completed an industry-wide upgrade to FIX 4.4. The top 25 brokers are now certified with FIX 4.4 to the BMV. Leading the way, are brokerages like GBM, Interacciones, Actinver, UBS Mexico, IXE and others.

Now that Mexican brokers speak FIX 4.4, all of the order routing to the BMV can now be done through FIX allowing the BMV to retire the antiquated SETRIB protocol. The only way the BMV will allow Mexican brokers to continue to use SETRIB is by paying excessive fees, and even this will not be allowed by the end of 2011. Retiring SETRIB sets the stage for more positive changes in the industry and at the BMV.

Work is already underway to upgrade the BMV’s trade matching engine. The existing engine was built in the 1990s for a Tandem mainframe. Retiring the Tandem has many benefits. Faster order matching and processing is high on the list. In addition, more choices for application and software vendors and significant cost savings are expected. Retiring the mainframe will also eliminate the scheduling nightmares associated with the limited availability of the central mainframe for testing with the broker community. The new matching engine will be hosted on modern Unix based hardware. The release of the new matching engine and infrastructure is planned for the first quarter of 2012.

Another important milestone is the availability of a state-of-the-art co-location facility at KIO Santa Fe. The BMV infrastructure is located here and starting in October it will be easy for brokers and third party providers to collocate order routing and market data in this hosting facility leading to high throughput low latency services.

While all of the infrastructure and matching engine upgrades are momentous, they would bear no fruit without the simultaneous modernization of Mexican regulations. The initiative to modernize Mexico’s regulations, called RINO, began a year ago and phase two is due to rollout in the fall of 2011. The goal of RINO is to conform Mexican regulations to international standards. By converging with international standards, regulators hope to bring more international order flow and greater liquidity to the market, resulting in increased investment in the Mexican market.

While regulations in the US like Sarbanes Oxley and Dodd-Frank can be seen to drive businesses offshore, the regulatory changes in Mexico are removing handcuffs from businesses and facilitating opportunities. The first step forward occurred early this year with RINO I. RINO I allowed brokers to have multiple channels to the BMV’s electronic trading system. Previously all orders were in a single queue. Multiple access points per broker provides more flexibility in executing strategies and handling client requests, including separate BMV channels for program trading and orders called into the trading desk. RINO I also eliminated sizebased criteria from order management, thus leveling the playing field in the processing of orders. RINO II takes effect on October 10, 2011, bringing more modernizations including pegged orders, improvements in crossing operations, average price operations, price delivery regardless of volume, and decimal bids for fixed income securities.

Crosses, in which a brokerage carries out a transaction through the stock exchange between two of its clients, were permitted previously but the rules were very arcane. Starting in October, the crossing operations will be vastly simplified allowing clients to simply choose whether to cross inside or outside the spread. With this modernization, the BMV hopes to repatriate orders that brokers would previously carry out in the US, where crossing orders was possible using ADRs in dark pools or at the NYSE.

In addition the RINO II regulations a very important new mid-point hidden book order. The orders execute at the midpoint, broker anonymity is guaranteed and the order priority is determined by volume. This is effectively a dark pool. Similar to Xetra, this new BMV order helps the market participants and simultaneously protects the BMV from providers toying with moving into the Mexican marketplace.

As the regulations modernize and the FIX infrastructure hardens, opportunity beckons. Brokers are beginning to push for more high frequency trading algorithms, more efficient routing of international orders, and more sophisticated risk controls, all of which will attract even more international business. As the need for speed grows, co-location previously offered by the exchange may become more strategic, particularly to brokers wanting to attract high frequency traders.

All of this progress was made possible in large part because of the exchange’s demutualization and subsequent listing in 2008. The demutualization coincided with rule changes allowing Mexico’s pension funds or AFORES to invest. Before the rule changes, the AFORES were forced to invest almost entirely in short-term government paper. Today, Mexico’s pension funds are allowed to invest up to 25 percent, in individual stocks and shares and 12 percent in a hybrid of corporate debt and equity capital to allow companies to raise funds to expand businesses.

Considered together, regulatory improvements and infrastructure updates have morphed the BMV and the Mexican brokerage community into a thriving and modern marketplace. The BMV reported a 22 percent jump in earnings last year, with operating income increasing 70 percent in the last three months. A record six initial public offerings made it to market last year and overall trading volumes rose 50 percent in 2010. This year Mexico’s IPC index has tested and hovered near record highs.

In 2011 there are fewer IPOs, but trading volume remains strong. The order-routing agreement signed with Chicago’s CME Group has opened Mexico’s derivatives market to the world. Now, electronic trading infrastructure and investor friendly regulations have set the stage for act two.

Latin America has enjoyed a strong recovery for the most part it has sailed through the recession without lasting damage. Boosted by capital inflows, by record prices for commodity exports, by sound policies and by a heady expansion in domestic credit, the region saw economic growth of 6% last year and is on course to notch close to 5% this year. The region faces slower growth but not disaster. To up the pace, now is the time for reforms to boost productivity.

The main engines for growth in Latin America are China’s demand for minerals, food stuffs and raw materials – this looks set to continue – and consumption as tens of millions edge out of poverty and benefit from newly available credit.

April 7, 2011, TheTrade Fidessa launched a new platform for brokers tailored specifically for trading in Mexico, following the introduction of new market regulations in September 2010.

Fidessa clients will have functionality for trading across asset classes that is compliant with new routing and order prioritization rules introduced by domestic exchange Bolsa Mexicana de Valores (BMV) in conjunction with trade body the Mexican Securities Industry Association and Mexican regulator, the Comisión Nacional Bancaria y de Valores. Specific to Mexico, the platform allows brokers to establish multiple channels to the exchange using separate FIX connections and supports all the new order types made available by the changes to regulation.

According to the BMV, “Average daily orders in the Mexican cash market have increased threefold over the past year, and as global investors look to Mexican markets for new opportunities, we remain focused on improving functionality and trading rules. By working with a company such as Fidessa, which has developed solutions to address regulatory changes like MiFID in Europe and RegNMS in the US, we are taking another big step towards increasing foreign interest and investment in Mexico.”

Boston – February 22, 2011 – Charles River Development (Charles River), a front- and middle-office investment software solutions provider, today announced that Principal Financial Group Mexico, one of Mexico’s largest banking groups, has completed a multi-phased rollout of the Charles River Investment Management System (Charles River IMS) across its Principal AFORE (pensions) and Principal Fondos de Inversion (mutual fund and asset management) divisions in Monterrey and Mexico City. Principal was the first Charles River client in Mexico to implement Charles River IMS. The project is part of Principal’s initiative to ensure business growth by automating manual processes and offering more sophisticated investment strategies for investors and retirees.

Phase One of the project, completed in 2008, automated Principal’s compliance monitoring of domestic equity and fixed income instruments. This final phase provides Principal AFORE and Principal Fondos de Inversion users with automated portfolio management, trading and compliance monitoring for local and international asset classes on a single-consolidated platform. Charles River’s implementation experts also built seamless interfaces with Principal’s proprietary mutual fund accounting system and third-party pension accounting system, Soluciones. In the near future, Principal plans to support more derivative instruments, including credit and interest rate swaps.

During the rollout, Principal was instrumental in advising Charles River on Mexico’s unique requirements and workflows. Charles River IMS supports Mexican fixed income instruments, including corporate and government Bonos, CETES and UDIBONOS. Users can also manage collateral for Mexican repo transactions, including interest rate calculations.

“To stay ahead of Mexico’s evolving regulations for mutual fund and pension portfolios, we required an integrated platform that could streamline workflows and support complex investment instruments,” said Alejandro Echegorri, chief financial officer, Principal Financial Group. “With Charles River IMS, we have a truly global system that enhances our competitiveness in the region. Our traders, portfolio managers and compliance officers can now trade and monitor all asset classes, including specialized debt for local, global and emerging markets. Further, we have eliminated our dependence on spreadsheets and reduced our risk throughout the trade process.”

“Charles River provides asset managers in Mexico and worldwide with the technical infrastructure to support new asset classes and increased trade volumes for future growth,” said Spiros Giannaros, vice president-sales, Americas, Charles River Development. “The system makes it easy to analyze portfolios and implement changes in real-time. Users also have an end-to-end audit trail to validate compliance throughout the trade lifecycle.”

Headquartered in Monterrey, Mexico, Principal AFORE is a private pension company that manages and administers individual employee retirement plans through the state mandatory retirement system Administradoras de Fondos de Retiro (AFORE). Since our inception in 1997, Principal AFORE has earned a top-five market position in the pre-retirement accumulation market.

Also headquartered in Monterrey, Principal Fondos de Inversión has generated impressive growth in the retail mutual funds segment and has shown market leadership in the creation of specialty products catering to high net worth clients. In addition, the company has begun important distribution agreements that will permit us to develop brand recognition and increase our assets under management.

October 21, 2010 – Charles River Development (Charles River), a front- and middle-office investment software solutions provider, today announced that Scotiabank Inverlat, S.A. (Scotiabank Mexico), one of Mexico’s largest banking groups, has implemented the Charles River Investment Management System (Charles River IMS) across its Scotia Fondos subsidiary. The multi-phased project, delivered on-time, is part of Scotia Fondos’ initiative to automate its domestic and international mutual fund (Fondos de Inversion) operation with 16 different portfolio options on a single, consolidated platform.

Scotia Fondos’ users benefit from advanced decision-making and analysis tools, automated portfolio management and trading, and real-time, pre-trade compliance monitoring for all asset classes, including equities, money market, mutual funds, as well as Mexican corporate and government fixed income instruments, such as Bonos, CETES and UDIBONOS. During the initial project, Charles River automated Scotia Fondos’ equity portfolio management and trading operations, as well as compliance monitoring. The second phase consolidated capabilities across the firm’s fixed income operations.

“We required a state-of-the-art system and a vendor with proven experience in supporting the needs of Mexico’s asset managers; Charles River delivered both,” said Ernesto Diez, Director General, Scotia Fondos. “Our portfolio managers can now stay ahead of the market by analyzing and rapidly implementing changes to portfolios. We can also validate that our portfolios comply with all mandates – at any time and for any asset class.”

Support for Mexico’s numerous local market requirements was critical to the project. Charles River IMS allows Scotia Fondos to manage and execute trades for all Mexican government and corporate debt instruments. The firm’s mutual fund traders can also execute stock lending, support repurchase agreements and rebalance against Mexican indices. In addition, Charles River’s open architecture makes it easy for Scotia Fondos to integrate with its proprietary accounting system, as well as back-office providers, such as Bloomberg for real-time pricing, and Mexican Stock Exchange-owned Valmer for risk data.

Charles River IMS supports region-specific security types and associated workflows, including Mexican corporate and government bonds. In the near future, Scotia Fondos will continue with the implementation of Charles River IMS’ advanced derivatives exposure calculations and coverage functionality helping clients comply with Mexican regulations, such as Comision Nacional Bancaria y de Valores (CNBV) rules, by monitoring and managing pre- and post-trade exposure to derivatives instruments. Charles River’s pre-built compliance libraries contain over 1,700 regulatory and general example rules across 35 regulatory bodies of 20 countries, including comprehensive rule libraries for Mexico.

“Charles River offers asset managers in Mexico sophisticated, yet easy-to-use solutions for expanding their operations into new asset classes and markets – delivering a competitive advantage that supports business growth,” said Spiros Giannaros, Vice President of Sales, Americas, Charles River Development.

Charles River supports five client firms in Mexico, and serves over a dozen firms across Brazil, Chile, and Panama.

The release said Banorte is “analyzing different strategic alternatives to continue consolidating its leadership position as one of the most important institutions in the Mexican financial system.”

IXE released a similarly vague statement through the BMV, saying it was “exploring options to increase its competitive capacity in the Mexican financial market.”

RUMOR RILES MARKETS

The acquisition rumor that sparked a more than 2% jump in IXE’s stock price on Friday (Oct 1) started with Alberto Aguilar, a financial columnist with daily newspaper El Universal, who published an article that afternoon saying that Banorte “is in very advanced talks to acquire IXE.”

Aguilar’s un-sourced columns have frequently been accurate this year as the rumors have swirled over a possible acquisition of non-bank mortgage lender Hipotecaria Su Casita.

Curiously, this is the second time in recent days that Banorte and IXE have appeared in the same headlines in Mexican papers. Earlier, both banks said they would like to be involved as investors in the restructuring of troubled Mexican airline Mexicana: Banorte by possibly converting a loan to the company into an equity stake and IXE by rounding up a group of investors to purchase the company.

Banorte general manager Alejandro Valenzuela had told the Mexican media that he was “very happy” that IXE was interested in getting involved in the Mexicana restructuring.

IXE PROFITS LAGGING

IXE Grupo Financiero has not been very profitable as of late and has had some trouble picking up the pace following the financial crisis of 2009.

The financial group – which includes an insurer and a securities broker, as well as the 11th largest bank in the Mexican market – earned 28mn pesos (US$2.2mn) in the first half, down 83% from its 1H09 earnings.

As a consequence, the group had a 12-month ROE of 0.89%, the lowest of the 25 financial groups tracked by Mexican banking and securities commission CNBV and far below the industry average of 14.9%.

The group also had to close an ill-timed middle-class consumer banking venture called Banco Deuno that it launched in 2008, rolling it up into its flagship bank in August.

Should Banorte complete a full acquisition of Grupo Financiero IXE, the financial group would overtake Santander Mexico to become the third largest financial group in the Mexican market by assets, behind Banamex and BBVA Bancomer.

Grupo Financiero Banorte is the only top-five financial group in Mexico that is controlled by Mexican capital.